Gaar In 2026 : What The Latest Clarifications Mean For Legacy Investments

Introduction : Let’s consider the case of a foreign investor who invested in an Indian company prior to 1 April 2017 and aims to exit in 2026 via a restructuring. The investment was grandfathered, but it was unclear whether the subsequent transfer would be subject to the General Anti-Avoidance Rules (“GAAR”).

The uncertainty was further compounded by the Supreme Court decision in the Authority for Advance Rulings (Income Tax) & Ors. v. Tiger Global International III, which confirmed that GAAR can override the benefits of a treaty where the arrangement is an impermissible avoidance arrangement, and that there is no commercial substance. The Central Board of Direct Taxes (“CBDT”) in response, made two Notifications dated 31 March 2026 and notified Rule 10U of the Income-tax Rules, 1962 and Rule 128 of the Income-tax Rules, 2026, which clarified that GAAR shall not apply to income on the transfer of investments before 1 April 2017, even if the transfer took place after that date.

In this background, this article asks the question that, will the clarifications issued by the CBDT give complete certainty in respect of legacy investments or maintain the grandfathering benefit without any impact on post-transfer restructuring and substance-based scrutiny of investments under GAAR? It explores the consequences of these clarifications as regards transfers, corporate restructuring and tax planning of legacy investment portfolios.

Legal Provisions

• Income Tax Act, 1961

The GAAR contained in Chapter XI-A from sections 95 to section102 of the Income Tax Act, 1961, empower the tax authorities to declare an arrangement as an Impermissible Avoidance Arrangement (“IAA”) where its main purpose is to obtain a tax benefit and it satisfies any of the conditions specified under Section 96. Section 95 sets out the application of GAAR, and Sections 97-102 set out the consequences if GAAR is applied, such as disregarding or recharacterizing arrangements and reallocating income, withholding from treaty benefits and tax benefits. The same principle is followed in the Income-tax Act, 2025 in the provisions.

• Income Tax Rules, 2026

  
  

  The Income-tax (Amendment) Rules, 2026 made the amendments to Rule 10U of the Income-tax Rules, 1962 and introduced a new Rule 128 in the same Rules with effect from 31 March 2026 and 1 April 2026, respectively. Both provisions make clear that the GAAR will not apply to income from the transfer of investments that were in place before 1 April 2017, regardless of the date when the subsequent arrangement is made. The amendments maintain the grandfathering benefit for legacy investments and its continuity under the erstwhile Income Tax Act, 1961 and the new Income Tax Act, 2025, thus giving a greater sense of certainty to investors making transfers or restructuring their pre-2017 investments.

• International Framework

  
  

  At the international level, Article 29 of the OECD Model Tax Convention (Principal Purpose Test) and Article 7 of the Multilateral Instrument reflect the global shift towards denying treaty benefits where one of the principal purposes of an arrangement is to obtain a tax advantage. Similarly, the OECD/G20 BEPS Project recommends against the abuse of treaties for the sake of avoiding tax with rules based on substance (Action 6). These international standards also reinforce the concept of tax outcomes based on commercial substance, rather than legal substance, of the transaction, complementing India’s GAAR regime.

Legal Analysis

• Limited Scope of the Grandfathering Clarification

The CBDT Notifications continue to provide grandfathering advantage to investments made before 1st April 2017, but do not provide blanket immunity from GAAR scrutiny. The clarification only applies to tax treatment of income generated on the transfer of such investments and doesn’t explicitly cover complex transactions like mergers, demergers, indirect transfers or multi-tier corporate restructurings. This can lead to interpretation challenges if the taxpayer later restructures and is then challenged by the tax authorities as a new avoidance arrangement. Such uncertainty may lead to higher litigation costs and to less efficient corporate reorganisations involving legacy investments in the long term.

• Continuing Emphasis on Commercial Substance

  
  

  The amendments confirm that the general operation of GAAR does not get overruled by grandfathering. In the wake of Tiger Global, the tax authorities might still look to determine if an arrangement after the transfer is supported by a genuine commercial substance or simply has been arranged to gain tax benefits. As a result, any subsequent transactions will now require taxpayers to show a valid commercial use for the investments and not just the pre-2017 aspect. The trend toward substance-over-form thinking is likely to have an impact on future tax planning and restructuring strategies.

• Implications for Transfers and Restructuring

In the case of transfer and restructuring transactions, the tax treatment of legacy investments is particularly important. The grandfathering benefit offers more certainty to exits from investments made before 2017, but businesses that have an internal reorganisation, cross-border reorganisation, or ownership realignment must keep in mind that they must have a good business reason for the transaction, and provide sufficient documentation. Otherwise, transactions may be subject to GAAR, and investor confidence may be compromised because of the increased compliance costs and the delay of transactions. While, over time, the clarification is likely to drive greater tax due diligence and commercially oriented restructuring as opposed to tax-oriented restructuring.

Relevant case laws

In The Authority for Advance Rulings (Income Tax) & Ors. v. Tiger Global International III Holdings, 2026 INSC 60, the Supreme Court clarified that where an arrangement is an impermissible avoidance arrangement, without commercial substance, it will displace benefits of the tax treaty. The ruling continues the trend of “substance over form” and makes clear that “no one can improve their tax situation through a treaty.”

Union of India v. Azadi Bachao Andolan, (2004) 10 SCC 1: The Supreme Court recognised that legitimate tax planning is permissible and upheld the validity of the India-Mauritius Double Taxation Avoidance Convention. The decision clarified the difference between lawful tax planning and unlawful tax evasion and is a key precedent on the interpretation of benefits.

In the case McDowell & Co. Ltd. v Commercial Tax Officer, (1985) 3 SCC 230, the Supreme Court said that a colourable device merely for the purpose of evading tax is not permissible. The decision provided the jurisprudential basis to India’s anti-avoidance provisions, which were later enhanced with GAAR.

In Vodafone International Holdings BV v. Union of India, (2012) 6 SCC 613, the Supreme Court highlighted that in principle, structures and tax planning should be respected if they are true and not shams or colourable devices. The decision remains a key guidepost for cross-border investment arrangements for the purposes of interpreting commercial substance.

In Commissioner of Inland Revenue v. Euro Pacific Capital Ltd. [2009] NZSC 122, the Court took a substance-over-form approach and found that tax advantages should not be granted if transactions are legal, but fail to achieve the purpose of the tax laws. The ruling comes at a time when the world has been moving towards strong anti-avoidance doctrines.

Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54: The Court found that the anti-avoidance provisions should be engaged when a transaction is designed to defeat the purpose, spirit and object of the tax law. The decision offers valuable insights on the balance to be struck between legitimate tax planning and the anti-abuse principles, akin to the GAAR provisions in India.

Practical Implications

While the 2026 CBDT clarifications bring clarity to investments made prior to 2017, they raise a few important practical questions for stakeholders with legacy investment structures.

The uncertainty that investors and multinational enterprises face in applying GAAR to complex restructuring scenarios involving grandfathered investments, like mergers, demergers, indirect transfers and holding company reorganisations, is the first point to acknowledge. While the initial investment may be shielded from tax risk, ongoing deals might be analysed for commercial substance and taxpayers should be mindful of the tax impact before reconceptualising legacy investments.

Secondly, the clarification puts a greater emphasis on strategic tax planning for private equity funds, VC firms, and corporate groups. It is important for the stakeholders to keep good records to document the date of investment, the chain of ownership and the business need that formed the basis for any transfer or restructuring. Documentation issues can create the potential for long-term tax disputes and compliance expenses if it is not sufficient to keep investments grandfathered.

Thirdly, the amendments further highlight the need for an in-depth tax due diligence process when advising on exits, cross-border transactions and (internal) reorganisations for tax professionals and legal advisors. Just being grandfathered is not enough; advisors need to make sure that legacy investment mechanisms have commercial substance and don’t face GAAR arguments.

Policy-wise, the CBDT has provided clarity on treatment of pre-2017 investments, but further clarity on the application of GAAR to restructured transactions involving legacy investments would further eliminate interpretational uncertainty, minimise litigation and offer greater certainty for investment planning.

Conclusion

The CBDT clarifications for 2026 are a hefty step towards giving certainty to legacy investments by continuing the grandfathering benefit for investments made before 1 April 2017. However, this does not detract from the overall application of the GAAR which remains focused on commercial substance over legal form. This means that taxpayers now have better information about the tax consequences of investments made prior to 2017, but that transactions involving such investments are still subject to review on the basis of their lack of commercial substance.

Substance tax planning, therefore, is likely to be the focus of the future of GAAR, and not relying on a treaty benefit or formal tax structure.

First, CBDT should provide detailed directions regarding the application of GAAR to mergers, demergers, indirect transfers, share swaps and other restructurings involving grandfathered investment in order to minimize the continuing uncertainty. While it may be said that too much guidance might stifle the flexibility of tax officials to keep up with new avoidance schemes, the idea of interpretative guidance would help avoid needless litigation, would give taxpayers greater certainty of treatment and would increase the consistency of how the law is applied without diminishing the anti-avoidance purpose of GAAR.

Second, taxpayers should consider regularly reviewing legacy investment structures and ensuring there is good documentation of the date of any investment, ownership history and commercial reasons for subsequent transfers and reorganisations. This could raise the cost of compliance, especially for multinational groups and investment funds with complex organizational structures, but in the long run, the value of the tax certainty, tax planning and restructuring advantages far outweigh the administrative burden.

The 2026 changes are not an indication of a switch in the stance of the GAAR but rather an evolution in how the GAAR is applied. Future tax planning for legacy property will not only require compliance with the statutory grandfather provisions, but will require evidence of commercial substance to ensure tax certainty and longevity of investment planning.

Author: Aaransha Shankar in case of any queries please contact/write back to us via email to content@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.